The new residence nil-rate band comes into force this week and yet, according to research commissioned by Old Mutual Wealth, the great majority of people know nothing about it. The “£1million exemption” was a great headline grabber for George Osborne and the Conservative party, however in reality, this has made Inheritance Tax (IHT) planning that bit more complicated.
The ‘main residence nil rate band' as it is known, has added a further ten pages of legislation to the Finance Bill, and added another layer of complication to estate planning. A far simpler approach would have been to increase the existing standard nil rate band of £325,000. This could have delivered a greater benefit and been far easier for the public to understand.
The research, which was conducted last month, asked the opinions of over 1000 respondents living in the UK, aged 45 and above and found almost three-quarters (70%) knew nothing about the residence nil-rate band.
From 6 April, the measure adds an additional £100,000 inheritance tax (IHT) allowance on to the current nil-rate band of £325,000. The residence nil-rate band is due to rise to £175,000 by 2020, which would mean by that point a couple could pass £1m to beneficiaries free of IHT. The scheme is estimated by the Treasury to cost the UK nearly £1 billion in lost taxes by 2021, so it’s important to understand the impact it has on all of us and our families.
The basic principle of the new residence nil-rate band is that a family home can be passed on to direct descendants ‘free' of IHT, Unsurprisingly though, the rule is not that simple and what politicians announce in headlines is another case of it not being ‘exactly what it says on the tin.
The five areas the respondents were most confused over.
1. You can select which property to have the allowance against (45% surveyed did not know)
The rule can apply to any one home included in the estate as long as it was lived in by the deceased at some stage before their death. The home does not even have to be in the UK, but it does have to be within the scope of IHT and it must be included in a person's estate.
2. The allowance will still apply even if the property is sold (45% did not know)
The government did not intend the residence nil-rate band to stop individuals from downsizing or selling their property. So they added a rule that, roughly speaking, means the value of the estate made from downsizing or disposal of the property is eligible for the allowance.
3. Any outstanding mortgage is deducted before applying the allowance (40% did not know)
The value of the home for residence nil-rate band purposes is the open market value of the property minus any liabilities secured on it such as a mortgage or equity release scheme.
4. Property must be left to direct descendants to benefit from the allowance (36% did not know)
To make use of the new allowance the beneficiary must be a child, grandchild or other lineal descendant or a spouse or civil partner of a lineal descendant. Direct descendants do not include siblings, nieces and nephews or any other relatives. It does however include step children, adopted children and foster children.
5. The allowance is being phased in (29% did not know)
The residence nil-rate band will eventually allow up to £175,000 of property wealth, per person, to be passed on with no IHT liability. It is being phased in, however, and in this coming tax year it will be £100,000.
As with everything, it’s really important to regularly sit down with your Independent Financial Adviser and look under the bonnet to see how the constant wave of new rules and regulations affect you and your family